"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

It seems as if every time traders (whose attention span these days is easily exceeded by that of a gnat - a little Dr. Zeuss here) forget the struggles that many nations in the developing Far East (particularly China) are having with inflation, news arises that serves to remind them that gold is not a US game only anymore.

Overnight, China once again hiked interest rates to try to tame this unruly beast. As a matter of fact, it is the third time this year that they have done so in an attempt to keep the monster from further rampaging through their streets. As they did before, it was another 1/4% or 25 basis points hike that was employed. As of tomorrow, the one year deposit rate will be 3.5% with the one year lending rate rising to 6.56%.

There are several points to take away from this. First, if investors/traders begin to believe that these minimal rate hikes will actually have their intended effect, they will see it as a huge negative to global growth overall.

Second, the Chinese well understand the risk trade and are attempting to defuse the hedge fund commodity buying associated with that trade. Rising agricultural and energy prices do not make the Chinese ruling class happy because those things make the working class unhappy. Get the hedgies selling commodities as an asset class in general, and prices for those goods will work lower, or so their thinking is.

Thirdly, with their officially reported inflation rate running above the interest rate on one year money (the Chinese have taken a page from the US authorities and are playing games with their equivalent to our CPI), REAL INTEREST RATES are negative. That environment is one in which GOLD thrives.

You can see that some of these effects are in play in today's trading session. The S&P 500 was knocked strongly lower this morning as news filtered into the marketplace of the rate hike. Combined with a lousy ISM number, it was enough to take stocks lower across the board.

Furthermore, yields on Portugal's debt continue to rise as Moody's downgrade to junk status of the same has made traders extremely nervous about Europe in general. Their 10 year is now at a record 12.44% while their two year is at 15.72%. YIKES! There are issues also with Irish debt and chatter is rising about Italy's and of course, Spain is not exactly a picture of robust health. This is serving to pressure the Euro and by default bringing strength into the US Dollar.

Benefitting from all this has been the US long bond, which after plummeting last week has started this holiday-shortened week off by rising nearly a full 1 1/2 points off its worst level of the past week. Bonds are benefitting from both a safe haven trade and fears that the Chinese rate hike will work to slow growth in China during a time in which US employment numbers remain stuck in nowhere land.

While commodities in general are weaker today based on the CCI, Gold, and silver, are actually benefitting from strong flows linked to safe haven buying. Silver remains as it always does, a schizophrenic market which cannot make up its mind whether it wants to be a poor man's safe haven or part of the risk trade. Today and yesterday is was a safe haven - tomorrow, who knows?

Gold on the other hand has been attracting a very strong safe haven bid ever since the Moody's downgrade hit the market. Yesterday it surged back above $1500, giving the bulls a psychological boost and today it has managed to push past the $1520 level, a level which has been noted previously as the bottom of a recent trading range, and through which gold must push if it is going to put a dent in the "sell the rally" mentality that has arisen in the yellow metal due to its position BELOW the 50 day moving average. It is no coincidence that the 50 DMA comes in at $1520 on the charts also. That is why a push through this level is so significant from a technical standpoint

I am closely watching how this market is going to act the rest of the day to see if it can maintain its footing above $1520. If gold is going to have a decent shot at recapturing its former range between $1520 and $1550, then the former level needs to hold on any subsequent retest back down toward there. As I write this about mid-morning CDT, gold has pushed further north and is now above $1530. Shorts are getting squeezed by some very strong buying.

Helping matters has been the good showing of the mining stocks in general as indicated by the HUI and the XAU. Both have continued to push up from their important recent bottoms with the XAU managing a push through its 50 DMA in yesterday's session. They both look like they are taking a bit of a break in their move higher today however. The XAU has pushed nearly 15 points off its support level near 190 while the HUI has tacked on nearly 40 points from its critical bottom around the 490 level. Traders are now stepping back to take the lay of the land and see whether or not they should take them higher or backfill a bit. If gold can better $1530 and hold there, the miners should move higher.

One very good thing however can be said about the mining stocks in general - both the XAU and the HUI set back and retested their previous swing lows that were made in mid June. The retest attracted BUYING however instead of SELLING and that confirms those lows as an important technical bottom on the price charts. Traders felt that prices for the shares were just way, way undervalued against the metals down at those levels and there were no longer any sellers left that were large enough to take them down through the value-based buying that arose at those levels.

They are not trending yet as that will require a closing push through 560 on the HUI and 210 on the XAU but they no doubt have some of the shorts in that complex nervous. The fact that they are moving higher today while the broader equity markets are seeing good selling pressure is indicative of that.

Oh, and by the way, I find it deliciously ironic that the politically-motivated release of oil from the SPR by the current administration has failed miserably. Have you noticed that crude oil is right back to where it was trading before the announcement of the oil release?

If you have benefitted from some of the articles posted here and would like to express your gratitude to Trader Dan for freely sharing some of the market wisdom he has gained over his long trading career, please feel free to Donate.

About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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